From what I’ve read, it seems like the bulk of them are stored in two custodial institutions:
Coinbase and Fidelity Custody.
I looked up how they both work:
On Coinbase they are said to be using Coinbase Prime. Which is like a service for high level customers.
Basically, Coinbase Prime uses its own cold storage kept offline by Coinbase, in the form of hardware wallets, and use multi-signatures on behalf of their customer.
Coinbase promises also that the cash balances of those accounts are kept 1:1 with their partner crypto banks.
On Fidelity they say they keep 98% of their clients Bitcoins in cold storage. The hardware wallets are kept in vaults with electromagnetic shielding, guarded by 24 hour security. They also use multi-signatures.
Some of the key weak points I’m seeing:Custodial storage still depends on trusting that institution.
Nobody really knows how many people have access to the keys and multi-sig.
Neither of these institutions has been able to show proof of reserves.
These institutions are not immune to government seizures on suspicions about your funds.
There are still multiple potential weak points with the app access, hardware wallet, institution’s own security.
These high security cold wallet vaults have still shown in the past that they are not completely immune to exploits, like with Zilliqa, Bitfinex, QuadrigaCX.
Employee exploit can still be an issue. Like that time when a Coinbase employee was bribed to get the customer’s logs and details.
There is the issue of these large cash balances needing a functioning crytpo bank to get your funds. Even if the coins were safe on-chain, the institution still needs to get the funds out of their crypto bank to pay you. If there is a crypto bank failure, and the exchange was to fail, they won’t have the cash to pay you. Crypto assets and stablecoins do not qualify for FDIC insurance.
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